23 March 2011

Fannie Mae and Freddie Mac Bailout Most Costly

As I noted yesterday, most of the bailouts in the wake of the financial crisis were cheap. In all, they cost less than $50 billion of taxpayer money, and a third of that went to job saving and federal government revenue preserving/federal government expense reducing bailouts of General Motors and Chrysler.

There were a pair of bailouts, however, that were much more expensive: Fannie Mae and Freddie Mac, the government chartered, but privately owned firms that repurchased mortgages and mortgage securities meeting their guidelines from mortgage originators. According to a Los Angeles Times story from September 2010:

The bailouts of the two former government-sponsored enterprises, which continue to keep the mortgage financing market afloat almost single-handedly, already have reached $148.2 billion as bad loans they purchased during the real estate boom continue to fail.

Concerns were raised about the ultimate price tag when the Obama administration in December lifted a $400-billion cap on the federal commitment to Fannie and Freddie through 2012. Officials at the time said they did so to provide certainty to the real estate market as the White House and Congress wrestle with the future of the entities.

[Federal Housing Finance Agency acting director Edward J.] DeMarco told a House Financial Services subcommittee Thursday that the total cost of the bailout "appeared to be less than $400 billion." That figure would hold even under most scenarios analyzed by Fannie and Freddie in which the economy suffers another "severe stress." . . . Altogether, Fannie and Freddie hold $1.6 trillion worth of mortgage loans.

The federal government guaranteed the obligations of Fannie Mae and Freddie Mac in exchange for a 79.9% ownership interest in each of them, and there are in receivership. There was not a legally binding guarantee of either corporation's debts by the federal government prior to the financial crisis, but many investors had invested on the assumption that these institutions would be considered to big to fail and to tied to the federal government (despite its lack of ownership) to permit their obligations to default.

Some of the loans Fannie and Freddie own include "buy back" obligations from the sellers if they were improperly unwritten (e.g. if they knowingly accepted false appraisals or false borrower information). As a result, "Lenders repurchased $8.7 billion worth of single-family mortgage loans last year, DeMarco said. And as of June 30, an additional $11.1 billion in repurchase requests from Fannie and Freddie were pending." But, that even if all of the requested repurchases were made, only a drop in the bucket of the total losses sustained. Several dozen subpeonas are outstanding to determine if there are more cases where repurchases can be requested.

Record low new home sales and falling median home sale prices in February suggest that the market to which Fannie Mae and Fredie Mac are exposed won't be recovering any time soon.

Lets recap:

Financial industry bailout (x Fannie and Freddie): Under $33 billion

Auto Industry bailout: About $17 billion (but saved Feds $25 billion)

Fannie and Freddie bailout: $148 billion+ (probably under $400 billion). Another estimate suggests a $154 billion taxpayer cost for the bailout.

Stimulus spending: $690 billion including:
*$158 billion for Bush stimulus package
*$150 billion in public works projects for transportation, energy and technology in Obama Stimulus package
*$87 billion to help states meet rising Medicaid costs.
*$3 billion for Cars for Clunkers
*$267 billion for other Obama stimulus package spending

Stimulus tax cuts: $563 billion including:
* $268 billion for Bush stimulus tax cuts
* $16 billion for Homebuyer's Tax Cut
* $116 billion for Obama's tax cut to 95% of Americans
* $166 billion for Obama's other tax cuts
* $13 billion for Obama's payroll tax cut holiday

Still unknown: Recoveries in lawsuits against bad loan originators and investment banks that lied to sell mortgage backed securities.

Selected private sector losses from the financial crisis:

The public cost of the financial crisis was accompanied by massive private sector losses. Stockholders of failed financial institutions lost almost everything, whether or not their shares were ultimately cancelled or merely diluted. Bondholders in General Motors, Chrysler, and many bailed out financial institutions also experienced great losses -- although some bondholders in failed financial institutions (most notably Fannie Mae and Freddie Mac) appear to have been held largely harmless if they had the intestinal fortitude not to sell out to speculators.

Thus, ownership of failed institutions largely got their just deserts, while senior management was often sacked but rewarded handsomely upon their departure, and bondholders (particularly speculators) sometimes benefitted a great deal from bailouts.

Trade creditors, on average, did very well compared to long term financial creditors.


* "fraud-related losses to AIG shareholders totaled $1.2 billion to $1.4 billion. Another methodology from the expert put the losses at around $543 million to $598 million" Shareholders in AIG (collectively) weren't completely wiped out, but lost almost everything: "AIG's share prices had fallen over 95% to just $1.25 by September 16, 2008, from a 52-week high of $70.13. At the stock market's opening on September 16, 2008, AIG's stock dropped 60 percent."


* Lehman Brothers shareholders, who were wiped out when it went bankrupt, lost about $41 billion in the year before it collapsed.

* As of March 16, 2001, "Lehman's revised plan would repay [Lehman] creditors roughly $60.1 billion, equal to about 18.6 cents on the dollar based on an estimated $322 billion of valid claims." It hopes to obtain approval for the plan by November.


* General Motors creditor losses: "Before entering bankruptcy on June 1, 2009, GM had $54.4 billion in debt and owed an additional $20 billion to a retiree health-care trust managed by the United Auto Workers. . . . GM now owes $15.6 billion in debt and preferred stock and $9.4 billion in underfunded retiree obligations." The retirees also received common stock, so may not be as underfunded as it appears looking only at liabilities. GM creditors lost about $40 billion.

* General Motors stockholder losses since 2007: $15 billion. GM shareholders were wiped out.


* Chrysler secured bondholders received 29% of the face value of their investment. Their losses were approximately $16 billion.

* Chrysler equity holders via Cerberus Capital Management purchased an 80.1% stake in the company from DaimlerChrysler AG on May 14, 2007 for $7.4 billion. Chrysler equity holders were wiped out. On October 23, 2008, Daimler announced that its stake in Chrysler had a book value of zero dollars after write offs and charges. Daimler paid $36 billion for all of Chrysler in 1997.

Fannie Mae and Freddie Mac

* Fannie Mae shares were trading at $69.49 on June 18, 2007 and were trading at 27 cents a share on September 30, 2010. Fannie Mae shareholders lost about $64 billion.

* Freddie Mac shares were trading at $34 a share at the end of 2007. By February 2010, its shares were selling at $1.21, a decline of about 96%. The loss to shareholders was about $17 billion.


A summary of market capitalization changes for some major players from October 9, 2007 and September 12, 2008 is found here:

Citigroup: $236.7 billion to $97.8 billion.
Bank of America: $236.5 billion to $150.2 billion.
AIG: $179.8 billion to $32.3 billion
Goldman Sachs: $97.7 billion to $61.3 billion
American Express: $74.8 billion to $45 billion.
Morgan Stanley: $73.1 billion to $41.1 billion.
Fannie Mae: $64.8 billion to $700 million.
Merrill Lynch: $63.9 billion to $24.2 billion
Freddie Mac: $41.5 billion to $300 million.
Lehman Brothers: $34.4 billion to $2.5 billion.
Washington Mutual: $31.1 billion to $2.9 billion

Washington Mutual would ultimately be wiped out in bankruptcy.

In that time period: "4 trillion has been wiped off the total market capitalization of the U.S. stock market . . . Of that, nearly $1 trillion is from the decline in the financial sector alone."

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